When it comes to the currency market, the peso has become an inverse proxy for Trump’s political fortunes and a shorthand for market sentiment on how well he is doing.
Over the past few weeks, as Trump’s standing in the polls improved, the peso was walloped by the market. But it saw a strong recovery Monday night after his first major stumble in days.
Trump’s performance was certainly less than stellar. But if there is anything that this election cycle has proven, it’s that the conventional wisdom does not apply. With less than two months to go, the presidential race is a toss-up despite the marked differences between the candidates. And no one can predict with any degree of certainty how the drama will play out.
If Trump wins, the peso could be in for more pain. But with so much of the scenario already factored into the price, the downside action in USD/MXN may be limited. On the other hand, on the other side of the globe, there is a currency that could lose as much as 10% of its value if the words “President Trump” become a reality.
That currency is the Australian dollar (AUD), which up to now has enjoyed a quiet, steady rise since the start of the year. Buoyed by one of the highest yields in the advanced industrialized world, the Aussie is the darling of every hedge fund on the planet that tries to make money on the carry trade by leveraging the interest rate differentials between Australia and the U.S. But its day of reckoning may be coming should Trump take hold of the nuclear button.
|American politics can radically influence the Australian dollar.|
Aside from Mexico, Trump’s other main nemesis is China. And a Trump presidency would no doubt instantly exacerbate tensions between the two countries. Their relations are already strained after a disastrous G-20 meeting in Hangzhou a few weeks ago, and Mr. Trump could quickly cast a pall on economic activity between the two nations with his call to renegotiate trade policies. Australia feeds commodities to China, and it serves as a major tourist and real estate hub for Chinese visitors.
Trump is also very likely to expand fiscal policy, blowing up the carefully restrained budgets of the Obama administration as he employs deficit financing. That in turn, will likely push U.S. rates up as inflationary pressures escalate, which will make the Aussie carry trade against the dollar much less attractive.
Finally, Mr. Trump is nothing if not unpredictable, and while that has worked well for him politically, capital markets generally abhor instability. Risk-aversion flows could rise at least in the first few months of his administration as markets ascertain his actions. The Aussie is the ultimate risk currency. It thrives when investor sentiment is positive and curls up like a porcupine at the first sign of investor panic, triggering a selloff in the pair as equities decline.
So while the conventional trade in the FX market will center on USD/MXN if Donald J. Trump becomes the 45th president of the United States, the much more interesting idea may be to consider the Aussie as the new proxy on Mr. Trump’s political adventure.
Faced with a record-low stock price, Deutsche Bank AG (DB) sold its British insurance division to help stabilize its financial position in the face of the U.S. Department of Justice’s demand for $14 billion to settle charges that it peddled junk mortgage-backed securities.
The bank sold the Abbey Life Assurance Co. for $1.2 billion to Phoenix Group Holdings, reports Bloomberg. The deal infused new life into the investment bank’s balance sheet with the cash as well as write downs on the division. DB stock rose as much as 4.4% on the news but still remains 50% below the same time last year.
Tesla entrepreneur Elon Musk is offering people the trip of a lifetime, reports Bloomberg, if you have $200,000 and a death wish.
If you do, you may qualify for a chance to found the first colony on Mars. The colonists will be chosen by Musk’s company Space Exploration Technologies Corp. – aka SpaceX. And within 10 years, they will be rocketed to the Red Planet to become a hedge for humanity against any apocalyptic event, including a stray asteroid or World War III.
But the odds of success are low, admits Musk, saying: “The first journey will be very dangerous, and the risk of fatality will be very high. Are you prepared to die? Then you are a candidate for going.”
It’s the end of an era; BlackBerry has announced that it will stop making its own cellphones. The company became famous for its keyboard-equipped cellphones that were must-haves for soccer moms, Wall Street traders, celebrities, and presidents, reports CNN/Money.
But the touchscreen revolution has left the BlackBerry in the dust – and sales have fallen to critical levels. The company plans to focus on software while serving die-hard fans by farming out the production of its phones – keyboard and all – to a telecom company in India.
The Money and Markets Team